Bridges: Speech to NZ Energy Conference 2014

It is the foundation on which we build economic
growth, prosperity and progress in our societies.

Across
the globe, we are all facing the same basic energy
challenge.

We want our citizens and countries to
continue to develop and prosper.

But we need to reduce
carbon emissions from our energy use and respond to climate
change.

We also need a supply of energy that’s reliable
and affordable.

At the moment, the world is in a
transition phase towards a low carbon future.

In this
transition, fossil fuels remain an important part of the
mix.

The International Energy Agency expects coal, oil and
natural gas will continue to account for more than half the
world’s energy needs until at least 2035.

The National
Government’s energy policy understands this reality.

In
the US, President Obama speaks of an “all of the above”
policy on energy.

That is also what we have here in New
Zealand.

New Zealand’s mixed and balanced
approach to energy

Our balanced and mixed
approach means that I am motivated by the opportunities
petroleum development presents for New Zealand socially,
economically and environmentally.

It is widely
acknowledged that gas will play a critical role in reducing
carbon emissions worldwide, and New Zealand could play a
real part in this if a significant gas find were made.

This is why we have worked hard to attract major
international companies to invest in petroleum and minerals
exploration and development in New Zealand.

New Zealand
has to compete with other countries for investment
capital.

It’s encouraging to see world class companies
like Statoil from Norway and Woodside from Australia
choosing to invest in New Zealand.

But while I am
motivated about petroleum development, I am also excited
about renewables.

It is renewables and smart technology
that will be the key to meeting longer term global energy
needs. Innovation and competitive markets are the smart way
to ensure this happens.

Innovation and competition
is driving change in the energy sector

One of the
best examples of a competitive and innovative market
that’s already delivering secure, affordable and
environmentally sound energy is New Zealand’s electricity
market.

New Zealand is extremely fortunate in having
abundant renewable resources, like water, geothermal and
wind. Electricity generation from renewables now makes up
about 75% of our electricity generation.

This makes us
fourth in the OECD for renewable generation.

New
generation capacity being built here is mainly using
renewables, particularly geothermal and wind. This is
happening based on competition between generators, without
the need for government subsidies or incentives.

There is
currently 166MW of geothermal capacity and 60MW of wind
capacity under construction. In the future, gas-fuelled
plants are likely to be used mainly for peak periods and in
dry years.

New Zealand is now a world leader in our use
of geothermal resources for electricity. The world’s
largest binary cycle geothermal power station was recently
commissioned here.

In the last six years New Zealand has
doubled our geothermal electricity generation capacity and
seen more than $2 billion invested in geothermal plant. In
that period 1,100MW of geothermal energy was installed
around the world – half of it (550MW) here in New Zealand.

New Zealand is now also making good use of our high
quality wind resources – a turbine on a New Zealand wind
farm runs on average 40% of the time, compared to around 30%
internationally.

Wind is now playing a small but
significant role in electricity generation. It contributed
around 5% of our electricity in the year to 30 September
2013 and, given the large number of additional potential
sites, wind and geothermal electricity generation could
double or even treble over the next couple of decades.

It
is the economics of these options for wind and geothermal
generation that have made them increasingly attractive to
generators.

The generators compete with each other to
build the next best generation option. A forward hedge
market sends longer term signals to investors on what the
market is prepared to pay for electricity going forward.

This competitive market for electricity generation
delivers the lowest-cost sources of energy, for retailers to
sell to consumers.

New capacity based on renewables is
also increasingly crowding out the older thermal stations.

For example, the 30 year old Huntly power station has
retired two of its 250 MW units over the past two years,
which halved its coal-burning generation capacity.

In
addition, gas plant is now increasingly used as "firming"
plant, filling in when demand peaks or wind or hydro
generation is reduced.

Changes made to the competitive
market also mean New Zealand is now much better able to cope
with a dry year, without the need for consumer conservation
campaigns.

The 2012 year was one of the driest on record,
but this went largely unnoticed by consumers.

The reason
for this is that if a conservation campaign is called then
electricity companies will now need to compensate consumers.
It’s good to see how changing incentives can have a
positive effect on water management strategies and market
behaviour.

Of course success and economic growth doesn’t
have to mean consuming more and more energy.

A recent
OECD study looked at the relationship between ICT and the
demand for energy.

ICT is key to driving productivity and
innovation, and with initiatives like the Ultra-Fast
Broadband programme it’s a big focus for the
government.

Interestingly the OECD study found that
increased ICT use in an economy comes with a reduction in
total energy demand and an increase in the relative demand
for electric over non-electric energy.

Having a secure
supply of clean, affordable electricity generation will
stand New Zealand in good stead in a digital future where
electricity becomes even more important as an energy
source.

Electric energy also offers a wide range of other
future possibilities, including an opportunity to reduce our
use of fossil fuels in transport through increased use of
electric cars.

With renewable electricity generation
already at 75% in New Zealand, we’re aiming for a target
of 90% of electricity generation from renewables by 2025.
This is a real advantage for our country.

By contrast,
Australia currently generates about 13% of its electricity
from renewables and has a target of 20% by 2020; the United
Kingdom has a 10.3% share of electricity from renewables,
with a target of 50% by 2015; and Germany has 21% from
renewables with a target of 35% by 2020.

Solar and
subsidies

Some governments have gone down the
track of introducing subsidies and other government
interventions to try to accelerate the move towards
renewables.

Generous feed-in tariffs have been used in
both Spain and Germany to incentivise solar energy.

These
tariffs provide a guaranteed, regulated payment to people
who use photovoltaic generators, which is above the
wholesale price and even sometimes above the retail
price.

This has seen significant expansion of solar
technology in these countries, but it has also had some
unintended consequences. Electricity prices have increased
and in Germany they are over 50% higher than in New Zealand.

There’s now enough photovoltaic capacity to meet 30-40%
of Germany’s daytime load, but this has created grid
stability issues.

It’s not easy to shut off solar PV,
so if Germany finds itself unable to export excess
electricity to neighbouring countries, this creates
congestion on the German grid.

And there’s a different
problem on days when the sun isn’t shining.

The rapid
uptake of solar in Germany has also contributed to increased
electricity generation emissions, as it has encouraged the
construction of more thermal generation to ensure adequate
electricity supplies when solar isn’t available.

In New
Zealand, where we already have a high proportion of
renewables driven by market forces, solar photovoltaic comes
in at about three times the cost of geothermal or wind. For
most people, the economics don’t stack up.

In by far
the majority of cases, New Zealand households would not
recoup the cost of installing a solar PV system, even over a
period of 15 years or longer. Subsidies might increase
uptake but they don’t work for solar in New Zealand.

New Zealand needs to take a smarter approach and think
about how emerging technologies such as solar could work
better in a more integrated way.

Vector is currently
running a successful pilot programme of domestic solar PV in
combination with batteries.

The storage batteries enable
some surplus energy to be stored during the day when the
house is empty, and released as needed – at night when the
household is busy turning on lights, cooking the evening
meal and using other electrical appliances.

End-users can
monitor what’s happening on their smartphones, using the
internet and smart meter technology.

The batteries are
also connected to the grid, so Vector has the ability to
release energy from them to reduce peak demand and manage
traffic on their distribution network. This could enable
Vector to avoid unnecessary expenditure in network
capacity.

Customers will respond to technologies when it
delivers what they want – not what policy makers,
politicians, environmental activists or energy experts think
they should want.

In the Vector pilot all of these
technologies are working together to deliver on what
customers almost certainly want – better service, more
control, more reliability and cost savings for end-users and
for the network, as well as delivering on environmental
objectives.

It is this sort of smart thinking that’s
needed to make technologies like solar really succeed in New
Zealand. Without subsidies, I might add.

The
future of energy markets

And this also gives us a
glimpse of what some of the key drivers of energy markets in
the future may be.

Dispersed small scale generation where
investment is happening at the customer level, smart meters
giving customers much more information and control over how
they use energy, and using the internet to network these
dispersed sources of power together, thus allowing the
optimisation of the system as a whole.

So this means some
sources of new generation may be located closer to users,
and be on a much smaller scale than the huge energy projects
of the past, with individual customers selling their surplus
energy back into the grid for distribution to other users.

This is a significant change from the historic model of
large-scale, centralised power stations disseminating
electricity from a central grid.

The new technology being
developed empowers consumers by giving them more information
and control.

In many ways this is the ICT revolution
coming to the energy markets.

The internet, the explosion
of cheap computing power and the smartphone revolution are
busy turning other industries on their heads, as well as the
energy sector.

A number of local electricity retailers are
already offering tools such as real time household
electricity monitoring via smartphone apps.

In the future
this is likely to develop into highly sophisticated tools
that allow customers to control, rather than just monitor,
their usage, for example to take advantage of low cost
periods.

A smarter grid

The way markets
and customers can interact in future will be key to
unlocking the benefits of smart electricity technologies and
increasing energy efficiency.

This is about
communications and ICT, and it’s also about having a
robust and smart electricity grid that can deal with
fluctuations in supply, and conveys market-based signals
quickly and efficiently between the different components of
the electricity system – generators, transmission,
retailers, and users.

Internationally, spending on smart
grid technologies such as advanced metering and fault
management is increasing. In 2012, global spend on smart
grids was $13.9 billion, with around half of this being
spent on smart metering and related infrastructure and
services.

This investment was 7% higher than in 2011, and
is expected to rise to $25.2 billion by 2018.

In New
Zealand we can build on the work that’s happening
overseas.

Global investment in distribution automation,
demand response, home energy management or smart electric
vehicle charging will deliver technical advances that we can
use to reduce energy consumption, keep our businesses
competitive, or make our homes more comfortable.

Smart
meters are already in more than 50 percent of New Zealand
homes and growing.

When combined with smart pricing plans,
smart appliances and home automation, they can help
consumers use less power at peak times (when it is
expensive) and more at off-peak times.

Enough changes in
consumption patterns across the whole power system could
mean fewer peak generators and smaller power lines required,
and lower costs.

The International Energy Agency has
called energy efficiency the world’s “first fuel”.

It means we can avoid using energy sources that cost more
and damage the environment.

Using energy more efficiently
will also help to displace ageing infrastructure, and reduce
carbon emissions.

On the supply side, advances in
technology mean transmission networks can make use of more
granular and timely information to help them manage their
assets better and to provide better services.

For
example, faster identification of a network fault – such
as a tree fallen on a line – would enable quicker repair
and power restoration for affected households.

And better
information about the condition of power system assets –
like poles and transformers – could mean less time and
money spent on routine maintenance and renewal – resulting
in lower costs for consumers.

These emerging technologies
will make very different demands on the electricity systems
of the future. We need to make sure New Zealand is well
positioned to capture the benefits of solar energy, electric
vehicles, and advanced meters as well as developments in
distributed automation, distributed storage and demand
response.

All parts of the system need to come together to
make this happen – generators, retailers, distributors,
businesses, scientists, consumers, investors.

New
Zealand Smart Grid Forum

This is why the
Government has worked with the Electricity Networks
Authority to set up a Smart Grid Forum. The new Smart Grid
Forum will provide a platform for dialogue between senior
representatives from all parts of the electricity system,
including consumers, as well as business, scientific and
academic interests.

Similar forums have already been set
up in a number of other countries.

I announced the Forum
in February. Today I’m very pleased to tell you who has
been appointed to the Forum. The members are (please bear
with me as there are a few to get through)

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